The danger of "greenwashed" ads

Despite an acknowledged consumer demand for “green” products, even in an economically challenged financial climate, growing customer demand is matched by a deep skepticism about accuracy in advertising. This skepticism seems honestly earned, as numerous watchdog organizations abound with reports of product exaggerations.

Although “balance” and “accuracy” are not always the bywords of advertising, failure to meaningfully and adequately capture and communicate environmental benefits and impacts in a balanced way can create real regulatory, litigation and public relations hazards ranging from unfair competition or false advertising lawsuits to regulatory enforcement actions and shareholder/investor lawsuits.

Areas of threat include Federal Trade Commission (FTC) or Food and Drug Administration (FDA) proceedings; piggyback or copycat consumer class actions under state law; state agency enforcement actions; business-to-business disputes under the Lanham Act, unfair competition or state law claims; and state attorney general actions and proceedings before the National Advertising Division (NAD), the advertising industry’s self-regulating body. Besides these litigation “hot spots,” losers in the green disclosure sweepstakes risk vilification in the all-important court of public opinion and consumption.

In terms of green marketing claims, both the carrot and stick approach apply in equal measure: Consumers reward effective and authentic green claims with loyalty that is price-resilient, and exaggerated or unsubstantiated green claims both alienate consumers and create regulatory and litigation risk.

The pitfalls of poor disclosures

Although the litigation and regulatory landscape around green advertising is still in its relative infancy, already the groundwork has been set for a dramatic increase in the number of lawsuits and enforcement actions related to green claims. Under the Obama administration, there has been a marked uptick in regulatory scrutiny of advertising claims by the FTC, which by its own description is tasked at the federal level with protecting consumers by “preventing fraud, deception and unfair trade practices in the marketplace.” Over the past few years, this general mission statement has translated to increased litigation activities, which hit a high water mark in 2009 and continue at a robust pace today.

Consistent with this goal, and explicitly acknowledging the growing importance of green advertising, the FTC, with the input of the Environmental Protection Agency (EPA), recently promulgated green guidelines designed to update and strength the agency’s guidance on green-related marketing claims. The Green Guides represent the FTC’s administrative interpretation of section 5 of the FTC Act as applied to environmental marketing. While the Green Guides do not have the force of law, they are both instructive and persuasive on the issue of false and misleading green advertising. Specifically, they caution product sponsors not to make blanket, general claims that a product is “environmentally friendly” or “eco-friendly,” which almost by definition overstate a product’s green attributes. The guidelines also caution against the use of unqualified certifications or seals of approval, which the agency treats as tantamount to a generalized environmental claim.

The guide is decidedly consumer-centric and is designed to evaluate claims from the perspective of the average consumer—a bias that cuts against broad, open-ended or confusing terminology. The guidelines identify certain “safe harbors” for green advertisers, and highlight areas of almost certain risk. Although the guidelines are not intended to be used as a lever for a “strict liability” like litigation approach, as a practical matter what may originate as an FTC, FDA or even NAD review can quickly morph into full-fledged civil litigation.

To avoid running afoul of FTC guidance on advertising, product sponsors should undertake a two-step inquiry for advertising claims:

1. Consumer perception. Is there a material representation that a reasonable consumer could construe? If so...

2. Substantiation. Does that advertiser have competent and reliable evidence to substantiate its claims?

Substantiation requires competent and reliable scientific evidence presented in a manner that does not overstate or otherwise mischaracterize the targeted environmental attribute or benefit. “Marketing” can be any consumer-facing communication, whether or not it is “selling” in the traditional sense. This includes statements companies make on their websites or in corporate sustainability policies, to the extent that one can reasonably conclude that the purpose of those statements is to achieve a halo effect with consumers based on a perceived environmental commitment.

Case study #1: Windex: Not-so-transparent cleaner

In Koh v. S.C. Johnson, Inc., filed in the U.S. District Court for the Northern District of California in March 2009, plaintiff Wayne Koh sued for violations of California’s statutory unfair competition laws, along with common-law fraud and unjust enrichment claims. Plaintiff alleged that S.C. Johnson had exaggerated and “greenwashed” its Windex and Shout products by designating them as part of the company’s own “Greenlist” portfolio of products, which according to the S.C. Johnson website refers to products that are tested against a “process to classify ingredients considered for use in products by their impact on the environment and human health.” In particular, Koh alleged that the “Greenlist” label was deceptively designed to look like a third-party seal of approval, and falsely represented to consumers that the products were environmentally friendly, in violation of the FTC’s Green Guides. According to Koh’s complaint, environmentally conscious consumers will pay up to 50 percent more for green-labeled products. After denying that it understood the term “greenwashing,” S.C. Johnson reached a settlement of an undisclosed amount when the trial court refused to either stay or dismiss the action.

Case study #2: Bad medicine = Big fines

Perhaps the most powerful cautionary tale to emerge on the advertising front in recent years is the $3 billion dollar fraud settlement between GlaxoSmithKline and the U.S. Department of Justice centering on alleged off-label use of the antidepressant drugs Paxil and Wellbutrin in violation of the misbranding provisions of the Food, Drug, and Cosmetic Act, as well as failure to disclose safety data from studies related to the diabetes drug Avandia. Although not an advertising lawsuit per se, the nub of the allegations revolved around alleged exaggeration of product efficacy beyond FDA approval and inappropriate minimization of product risk. The settlement also required implementation of a five-year corporate integrity agreement specifically targeting product claims by GSK’s sales force.